How To Build A 4-Week Treasury Bill Ladder: A Visual Guide

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For my magic trick today, I will be resurrecting a post from over 11 years ago! That’s the last time it there was any significant interest for an individual to buy Treasury Bills instead of using a top-yielding bank account. As of 6/18/18, a 4-week T-Bill rose to a 1.83% yield. Since T-Bill interest is exempt from state and local income taxes, your tax-equivalent yield could top 2% today.

This is a short visual guide on creating a Treasury Bill ladder, which maximizes your liquidity. If you use the TreasuryDirect website, it now includes an option for automatic reinvestment upon maturity, which makes things even easier after the initial setup.

Quick Facts

Treasury Bills are purchased at a discount and redeemed at the full par value. So for each $1,000 worth, you’ll pay ~$99x dollars upon issue and receive $1000 upon maturity.

You can either buy them at TreasuryDirect.gov, or from a brokerage firm that offers a bond desk like Fidelity, Vanguard, TD Ameritrade, etc.

Rates are set by auction, so you will not know your exact interest rate before you commit to buy. You can look at historical rates to help get you a ballpark estimate.

4-week T-Bill auctions are normally held on Tuesdays, and the T-Bills both issue and mature on Thursdays. Here is a list of upcoming auctions.

You must schedule your non-competitive bid before 11am Eastern time on the auction date (Tuesdays), otherwise you are pushed to next week. (TreasuryDirect now allows automatic reinvestment upon maturity for up to 2 years.)

The transfer of money to/from your bank account upon purchase/maturity is well-synchronized. That is, if one Treasury Bill matures (deposits $1,000) and another is issued on the same day (withdraws $995), your bank account should have a net positive $5 balance at the end of that day.

Visual Guide To Setting Up A Treasury Bill Ladder
Laddering is a method of purchasing that increases the liquidity of fixed term investments such as Treasury Bills. Imagine if you bought a T-Bill every week, and each one lasts for 4 weeks. After four weeks, you could simply use the proceeds of your first T-Bill to purchase your fifth T-Bill. The week after that, you could use the proceeds from your second T-Bill to purchase your 6th T-Bill, and so on forever. If you stopped buying T-Bills, you would get $1,000 back each week until all have matured.

TreasuryDirect now has a minimum purchase amount of $100, allowed in increments of $100. This means you would need to commit 4 x $100 = $400 to create a weekly ladder. Other brokerage firms may impose a higher $1,000 minimum per T-Bill. If you don’t have enough, you can simply buy them at less frequent intervals. Below are four visual examples for buying a $1,000 T-Bill every month, every two weeks, and every week:

In some months, there may be a gap between the T-Bill maturing and the next one issuing, but you should never have more than $1,000 invested “outside” in T-Bills. However, you may have to wait up to 28 days for your money to come back to you.

As you can see, you should never need more than $2,000 committed to T-Bills using a bi-weekly ladder. If you have $2,000, this would be a better way to set up your investments since in the worst case you can stop buying new T-Bills and get access to half your investment in 14 days once the ladder is constructed.

Practical Details
If you don’t already have a preferred brokerage account, you can buy T-Bills online at TreasuryDirect.gov. Check out the TreasuryDirect Guided Tour for a walkthrough; It’s very similar to opening an online bank account. You will need to verify your identity with your Social Security Number, but there is no credit check. You will need a bank account as an initial source of funds.

After logging in, do not use “Purchase Express”, click on the “Buy Direct” tab on top instead, and choose “Bills”. Here is a screenshot of the entire purchase screen, including the option for automatic reinvestment (into another T-Bill of the same type and term):

If you choose your interval correctly, everything pretty much goes on autopilot. For a 4 x $1,000 weekly ladder, you would just set up 4 purchases and have them reinvest automatically for up to 2 years. Note that I chose both the source and destination of funds to be my bank account. If you are using a savings account, remember that they are limited to 6 withdrawals per month. If you want to avoid the extra transactions at the expense of a little bit of interest, you may choose to use the “Certificate of Indebtedness” as your source or destination account. Just think of it as a savings account that pays no interest that serves as a holding place for money. Obviously, you don’t want to keep too much in there.

Bottom line. Individuals can invest in Treasury Bills, which are Treasury Bonds with a maturity of one year or less. T-Bill interest rates are now competitive with top online bank accounts, even exceeding them in some cases due to the interest being exempt from state income taxes. Structuring them as a T-Bill ladder is a way to increase your liquidity. By creating a ladder of 4-week T-Bills maturing every week, you can always have access to 1/4th of your funds in a week, 1/2 of your funds in 2 weeks, and so on.

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Comments

For example, on week 5, your bill from week 1 is maturing and you will be buying a bill for week 5. Can the funds from the sale of that first bill be in your account fast enough to buy the next bill that same week? Or are you going to have an extra $1000 that is not invested in bills for a week?

To avoid the dreaded 6 withdrawal/month issue you can also use the Treasury’s ‘C of I’ holding account. You don’t get interest on this ‘account’ but it very easy and quick to move any interest to one of your savings accounts. I have treasury ladders and after the first funding of a bill from a checking/savings account, just use the ‘C of I’ account to fund the next week’s purchase. All deposits and withdrawals occur on a Thursday so you can fund a new purchase with the funds from one reaching maturity via the ‘C of I’ account. You then just need to remember to sweep the interest into a savings account.

For places like Emigrant Direct and ING Direct, it is easy to open up several different accounts under one customer. (I don’t know if WaMu is the same way or not.)

Does anyone know if it is six withdrawals per customer per month, or is it six withdrawals per each account per month? If it is per account, you could set up a separate account to hold just T-bill funds with up to 6 transfers per month. Need more? Just open another account.

Maybe it’s more hassle than it’s worth to keep track of different account numbers and make sure everything comes out of the right place, but it seems like an easy way to make sure you get the most for your money and not make the banks mad.

Thanks for the awesome tutorial. I knew in theory how it worked, but the practical aspects of setting up the account via TreasuryDirect are perfect.

Quick question. I know the rates change, but can you give a ball-park of the types of interest you can expect from this process? For example, most of the MMF and MMA yields are around 5% or so now, what type of rate are you getting with the T-Bills this month?

Finally, I just recently opened a Vanguard Prime Money Market Fund, and it has checking writing privileges for checks > $250. Anyone know if setting up an automated process like the above would work with this type of account?

Thanks for the info! This explanation would have been very helpful a year ago 🙂
Because of your blog, I started putting my long-term savings into T-Bills, and it’s great to actually get a decent return.

so much hard work to save the small percentage of state taxes (which i actually forgot to do when I filed) you still need to pay atleast 1/4 (I hope that you are in the 25% bracket) of the interest to the gov.

you probably will be much better off investing in one of Vanguard’s funds (although I would recommend a diversified stock profile in Zecco.com), get around 10 percent with no need for counting pennies or other bs… and when you make so much you don’t have to be cheap and you could give some to your state 🙂 maybe they will build a nice park out of it.

How does the Certificate of Indebtedness work? Judging by the Treasury Direct description, it sounds like the CoI would be useful for creating a T-Bill ladder. But if I use the $1000 from the maturing bill to buy the new bill at $995, where does the extra $5 go? I’ll dig around the site a little more and try to find out, but I thought you might know.

Thanks for your excellent explanation. I’m trying to figure out if a ladder is worth the modest hassle, as compared to the convenience of something like Vanguard’s Prime Money Market fund. The problem, of course, is finding a way to compare the investment return. Vanguard reports that the Prime MM fund has a “seven day average income yield net of expenses” of 5.09%. The Treasury reports that the most recent 28-day T-Bill “investment rate” is 5.267%. Are these rates reasonably comparable?

Re James’ question about using a Vanguard Prime Money Market account. I just called Vanguard and asked. Because the Prime MM is not a real bank account, it doesn’t have an ACH number and cannot be linked to Treasury Direct. But you could set up a ladder using Vanguard’s Brokerage Services to buy the T-Bills, in which case you it would be linked to your Vanguard Prime MM account. But then there are two issues: One is commissions, but they are zero if you are a Vanguard Flagship customer. The other issue is that you cannot set up automatic reinvestments on Vanguard’s brokerage service. You’d have to remember to schedule the reinvestment each week.

“For example, on week 5, your bill from week 1 is maturing and you will be buying a bill for week 5. Can the funds from the sale of that first bill be in your account fast enough to buy the next bill that same week? Or are you going to have an extra $1000 that is not invested in bills for a week?”

Steve – Yes, it is always “fast enough”. The maturing T-Bill always gets deposited into your account the very first thing on Thursday morning. Then, any withdrawals from purchasing another T-Bill are taken out. It works very smoothly, like clockwork.

mc – thanks for adding that, I also added some info about the Certificate of Indebtedness to the main post. The whole “clockwork” thing works well with the CofI too. You could just deposit $4,000 into the CofI and start a weekly ladder.

Typo fixed 🙂

Chris – I think this is possible, although I also read that if you open account specifically to circumvent the rule and they find out, they can shut down your other accounts.

Wisely – I don’t know exactly, I’ve switched back and forth between 6-month T-Bills and 28-day bills as I watch the rates. I’m usually making about 1% APY than a comparable bank, so a few hundred dollars?

Ace,
Hindsight is 20/20, huh? In March 2007 you were seeing steady returns on Vanguard’s star fund of around 10%. In the two years after that, it dropped as much as 40% and didn’t reach that same value again until 2013… so that would have been six years at 0% return. If you still owned it today, you’d be up 30% over 13 years or only about 2% rate of return.

I believe the purpose of a T-bill ladder is as a comparable alternative to putting one’s emergency funds in a high-yield FDIC-insured savings account, i.e., conversatively invested and fairly liquid. I personally own the Vanguard STAR fund as well but not with my emergency funds.

While being a government agency, its 1099 format is non-standard and confusing. There’s no box number on the 1099. I suppose the T-bill interest belongs to box3 (am I right?). It’s totally up to the tax payer to interpret the numbers properly.

“You can easily link an existing online savings account, if you wish.”

How?

I know that the ELoan online savings account only allows you to withdraw funds to your linked checking account. So, the money would need to be moved to the checking account first then TreasuryDirect would deduct from there.

My question is: What online savings account allows withdraws using more than just checking? In other words, where can I find an account that would allow me to have TreasuryDirect withdraw funds from it?

Seems to me that Emigrant Direct will not work. I have two linked checking accounts already. Is that maybe the issue? I get this code from Treasury Direct “R20 – Non-Transaction Account”. Anyone else have this issue? I see that Jonathan, you said it worked for you, am I doing something different? Its not like there is a Treasury Direct routing number to use that I can link from the ED side, correct?

I just opened a new account at Treasury Direct but for some reasons they put a hold on my account saying that I need to sign a form and bring it to my local financial institution for verification. Any idea anyone?

I cannot figure out how to transfer funds from my “Zero-Percent C of I” account back to my bank account. How the heck do you do that?

As a side note, the Treasury Direct website is a huge mess with numerous user interface design issues and unexpected errors. Over the past 30 minutes of trying to figure out how to transfer funds, the site has displayed an error message and logged me out no less than 5 times. Each time I have to log back in to restart the session. I guess this is exactly what I would have expected from the Federal Government.

– This is a great tutorial on setting up a ladder. Thank you.
– I use ING checking for my weekly transfers. As the interest builds over time I just filter it to my Paypal money market which at last look was still paying over 5%.
– The TreasuryDirect site is the least user-friendly financial site I’ve ever seen except maybe for my student loan company. It needs major work to truly feel accessible to the common user.
– I just yanked the rest of my scheduled ladder for this year. Interest rates at the last auction fell to 3.33. Even with the non-state tax benefit, I can do better in my credit union or at ING or in my Paypal money mkt. If the yield improves, I’ll get back in.

With the recent problem with Bear Stearns going broke and JP Morgan buying their stock at $2 a share….stock market down and to scary…the mortgage loan market a problem…and the dollar going down….do you still recommend Treasury Bills and the ladder???

Big question can you give a ball park of what the interest rate might be at this time???

Jonathan, You can see a nice chart on yields at http://www.stockcharts.com. Your symbols can be $ust1m $ust3m $ust for prices and yields just do $ust10y $ust3y. more details on stockcharts.com website.

Lynn, If you want SAFE for a high dollar amount take a look at TIPS. They are the safest of the safe (with returns accordingly).

While securities have posted better yields when compared with govt bonds and the like, most people forget that securities must be sold. I have no idea what the future will bring, but if there are more sellers than buyers (reasonable scenario in the coming years), it may be difficult to unload your securities at prices commensurate with historical yields. The best game plan is to spread your money across many playing fields! I am surprised so many comments scoff at the idea of purchasing low yield bonds. Too many people with all their eggs in one basket!

I can’t imagine a worse investment strategy with Treasury bills at historical low levels. Why not do something like prosper where you can have a very diversified series of investments and a significantly higher return, regardless of the default rate of an individual loan.

This is really dumb. Why not just sell a book on eBay once a year. Seriously, setting aside $4000 to make a return of $5.20? No thank you. If you’re looking that hard for money, you need to change your priorities. And btw, I don’t know why you’re making up interest rates that are 5x higher than the current ones on 4 week notes.

Tough crowd. Are all you Lifehacker readers such nice folks? 🙂 I love the accusations for no good reason.

Check the date, this post was written in March 2007. Over 3 years ago. It is not new. Rates are accurate for the time period. Back then, believe it or not, T-Bills did earn higher rates than available high-yield and online banks.

Ha, I honestly have no idea. I appreciate the mention of course, but they never contacted me. It’s pretty much the worst timing possible. The last rate for a 4-week T-Bill as of 8/26/11 was exactly ZERO. 0.00%.

In March 2007, when this post was written – actually more than *4* years ago – the rate for a 4-week T-Bill was around 5%. On top of that, the interest paid is exempt from state income taxes, unlike the interest from a bank savings account. Here is the link from LH:

Very funny these folks who don’t look at the date… or the mention of WaMu… I landed here because I wanted to be sure about the maturity/purchase dates. I set up a ladder in 1992, a seven year ladder, because the yields at that time topped off at about 5% for 7 years. After 7 years I had treasuries maturing every year at 5%. Continued buying 7 year treasuries in ladder until July 2007 I sold all my stocks after Dow hit 14,000 and Bear Stearns fell. Everything has been in C of I until recently. Yields were either a hundredth of a percent or sometimes NEGATIVE in the last 8 years. Now yield is over 1% on a 4 week treasury. Making a little money on a month’s investment, with the least risk in the US Treasury.

Thanks for bringing back your article. I haven’t seen this one before and I find it useful. I’ve been laddering with 12 month t bills for six years and then as rates started going up, I’ve been moving my laddering into two year notes. The rates seem to be going up fast so I am going to hold off going to three year notes. I am working on $1000 per month moved into a two year note, so I need 24 of these to fully ladder. The nice thing is the overlap so that I will have $2000 maturing per month. I would hold up my nose until the three year notes yield above 5%. I have a bunch of EE savings bonds that are close to the end of interest payout so I will have to start moving them into two year notes to keep it going. Lots of fun!

Jonathan….am I missing something or are we talking about an annualized difference of about $6 on $4000 between lets say 1.65% in an Ally Money Market account and 1.83% with the Treasury Bills? Seems like a lot of work!

Thanks for bringing back this favorite topic of mine from when I first started reading your blog!

One correction: Unlike back then, the minimum for marketable security purchase is no longer $1000 at Treasury Direct. You can now purchase securities as small as $100 at Treasury Direct. I actually make use of this because I have multiple banks connected to Treasury Direct, and I can quickly look at the list and know my $1000 t-bills are from one bank and my $900 bills are from another.

T-bills bought at places like Fidelity and Vanguard still have a $1000 minimum, I believe. They also do not allow automatic reinvestment for as far ahead as Treasury Direct does.

I was just trying to find out if the automatic rebuy was going to give me problems with my bank. The info about laddering was an unexpected surprise. This is a much better strategy than the one I was going to use. Thanks!

I am comfortable investing/trading stocks & options but a complete newbie when it comes to T-bills & bonds. Thank you for a great intro Jonathan. May I know how T-bill returns are reported on the Federal Tax return? Is it complicated?

Two clarifying questions for you. If auto reinvestment is selected, once a bill matures would the net positive amount be sent to the maturity payment destination? What about the funding for the next bill, would the money be sent back to the funding bank account or remain in the treasury direct account for reinvesting?

I’ll try and answer this since the question has been ignored. This is, what I believe, occurs: Assume $100,000 is invested in a one-month T-Bill. Assume the interest earned for the month comes to $343.00. Assume 20 months of reinvestment. Assume the maturity payment destination is your external private bank.* At the end of one month, $43.00 will have been deposited in your bank account – NOT $100,343. Treasury Direct allows $100.00 minimum T-Bill purchases. So the amount that gets reinvested is the original $100,000 + $300.00 of interest (three multiples of $100.00). The residual of $43.00 would be sent on to your private bank.

* Note: You have the option of having the interest and final principal deposited into your (external) private bank account OR your internal Treasury Direct account called “Zero-Percent C of I”.

In my notes, I had written this: “4-week T-Bill auctions held on Tuesdays. T-Bills both issue and mature on Thursdays.” So if you bid on a Tuesday, but they are not issued until Thursday, does that mean you have to forgo interest for both Tuesday and Wednesday? As well, if you have a T-Bill that matures tomorrow (a Thursday), but the next T-Bill auction is the following Tuesday, does that mean the funds sit in a Zero-Percent Certificate of Indebtedness for Thursday, Friday, Saturday, Sunday and Monday? My bank is currently offering a rate of 1.75%. A few days of funds sitting in Treasury Direct’s Zero-Percent Certificate of Indebtedness would negate the benefit of using Treasury Direct in the first place!

Last question: If someone’s bank is offering a rate of 1.75%, do you recommend ACH’ing/pushing funds awaiting investment out of TD and then having TD pull those funds back at the exact time that they are needed? Or do you recommend leaving funds awaiting investment in TD’s Zero-Percent Certificate of Indebtedness? Timing is everything, I’m just not sure the automated system of TD and their C of I works in the best interests of the investor. Does it always?

Quick Facts #4 – 4-week T-Bill auctions are normally held on Tuesdays, and the T-Bills both issue and mature on Thursdays.
—
I’m thinking about laddering 13-week T-Bills. Currently, there is a 13 basis point difference between the 4 and 13. When/how frequently are the 13-week T-Bill auctions held, and when do they issue and mature? [There is no mention of the 13-Week T-Bills in the blog post.]

Also: if you set up the recurring re-investments, you CAN edit it later. If you start with 0 recurring, you can change to 1 or more (as long as it is before 11AM on the auction date), or if you have 10, you can edit to 0 as well.

So, oddly, TD is depositing my interest into my checking account, but I started funding purchases from my savings account. I’ve confirmed all these have “Maturity Payment Destination” set to my savings account, but my first interest payment was deposited in my checking account. I can’t find any place where my checking account is specified instead. Maybe it will clear up next week.

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